Flash Update – FCA Dear CEO Letter

As if they were waiting for us to finalise Payments View before they drop their big update, the FCA have just published their latest Dear CEO portfolio letter setting out their current priorities for payments firms.

These portfolio letters are key for firms – particularly as a way to scope out the areas that the FCA will likely engage on. Starting positively, the FCA acknowledges that they “have seen improvements by firms” over the last few years, but stress that there is more to do – especially on matters surrounding consumer protection and good governance. The letter specifically requires CEOs to engage with their Boards to “take necessary steps to deliver on the outcomes” the FCA has set.

With the last Payments Portfolio letter coming out almost two years ago in March 2023, we had expected this one to look quite different to accommodate the “fundamental” changes the FCA have promised in their letter to the Prime Minster (see the edition of Payments View that should have landed in your inbox earlier), the development of the industry, and the publication of the NPV. However, while the headline appears to align with HMG’s current fixation on growth, the main point that stood out is the continued focus on firm governance that runs through every part of the letter.

It’s also notable that the letter is less detailed than the 2023 update but with continuity across all of the key priorities. Two of the three outcomes from the last letter, for instance, are essentially the same in scope, being that:

• Firms do not compromise financial system integrity – which is still firmly focused on the role that firms play in preventing financial crime. In particular “it remains the case that weaknesses in some firms’ governance, oversight, and systems and controls make them a target for bad actors and risks the loss of critical services for customers” with the FCA pointing to their plans on engaging with firms on the APP scam regime. Of particular interest for some will be their strong position on ‘me-to-me’ payments which are firmly outside of the reimbursement regime itself, but seem nevertheless to be being gradually brought into scope as a result of the Consumer Duty. Firms also need to consider their approach to operational resilience, which is not surprising and, as EU firms that have recently worked through their DORA implementation know, is not a simple matter.

• Firms keep customers’ money safe – this outcome again remains similar in tone to the last letter, albeit with a greater focus on the proposed changes to the safeguarding regime (CP24/20) where the FCA gives a small update that they will publish ‘final interim’ (an odd phrase) rules in mid-2025. Prudential risk and wind-down planning are similarly in focus so do let us know if useful to benchmark your approach here.

Changes are more obvious for the following outcomes:

• Effective competition and innovation to meet customers’ needs, characteristics and objectives – which (unsurprisingly) differs from the 2023 update where the FCA were more focused on the Consumer Duty, particularly with the recent pushback on the Duty’s scope. Whilst some time is spent on the Duty, there is very little new in the way of substantive policy, with the key takeaway being the previously announced focus on the clarity of FX pricing in payment services. Instead, there is a lot of reference to ‘growth’, including the increase in dedicated supervisors for early and high growth firms as well as, it seems, a push for the FCA’s policy sprints (although we’re not aware of any newly announced sprints).

• Governance, oversight and leadership to help achieve the outcomes – this continues to be a key area of focus for the FCA but the current letter is more focused on the structural arrangements, systems and controls than the 2023 letter’s focus on the fitness and suitability of individuals. The agent and distributor models (which has been a real focus of the regulator over the last few years anyway) is similarly in the spotlight alongside an interesting reference to firms operating hybrid business models. Finally, whilst it is not new policy, the letter takes a firm tone on the location of key members of staff – stressing that both the head office of authorised PIs and EMIs must be in the UK and that “directors and other senior management who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis should be based in the UK head office”.

• Preparing for the future – where welcome steps are set out on Open Banking and the previously announced changes to SCA and the payment card contactless limit. Interestingly, the letter spends quite a significant amount of time on its expectations of firms to specifically engage on their consultation papers and events; we haven’t seen this before but we’d agree with the FCA that the next few years will see a lot of regulatory change and it is crucial for firms to engage at an early stage (around all their other time commitments!).

Overall the letter makes interesting reading but is more evolution than revolution for the FCA. Nevertheless, firms should make sure they engage on the topics raised, particularly if the FCA does follow up on its statement that it will specifically engage with firms on their findings.